1. Cost Allocation : Joint Products and Byproducts
관리회계2001
Cost Allocation : Joint Products and Byproducts

2. Learning Objectives
1. Identify the splitoff point(s) in a joint-cost situation
2. Distinguish between joint products and byproducts
3. Provide several reasons for allocating joint costs to individual products
4. Distinguish alternative methods of allocating joint costs

3. Learning Objectives
5. Describe why the sales value at splitoff method is widely used
6. Describe the irrelevance of joint costs in deciding to sell or process further
7. Distinguish alternative methods of accounting for byproducts

4. Joint Products, Main Products, Byproducts, and Scrap
Scraps
High
Low
Minimal
Relative Sales Value

5. Joint Process Joint Costs
Joint Process is a single process that yields multiple products simultaneously
Joint Costs
The costs of joint process

6. Joint Process A A’ B B’ C Processing Raw Materials Processing
Joint Costs
Separable Costs
Splitoff
Point

7. Joint Process

8. Examples Joint-Cost Situations
Separable Products at the Splitoff Point
Industry
Agriculture
Lamb
Raw milk
Turkey farm
Lamb cuts, tripe, hides, bones, fat
Cream, liquid skim
Breast, wings, thighs, drumsticks, digest,
feathermeal, and poultrymeal
Extractive Industry
Coal
Copper ore
Petroleum
Salt
Coke, gas, benzole, tar ammonia
Copper, silver, lead, zinc
Crude oil, gas, raw LPG
Hydrogen, chlorine, caustic soda
Chemical Industry
Raw LPG
Butane, ethane, propane

9. Why Allocate Joint Costs ?
Inventory costing and COGS computations for external financial statements and reports for income tax authorities
Inventory costing and COGS computations for internal reporting. Such reports are used in division profitability analysis when determining compensation for divisional managers.
Cost reimbursement under contracts when only a portion of a business’s product or services is sold or delivered to a single customer(such as a government agency).

10. Why Allocate Joint Costs ?
Customer profitability analysis where individual customers purchase varying combinations of joint products or byproducts as well as products of the company.
Insurance settlement computations when damage claims made by business with joint products, main products, or byproducts are based on cost information.
Rate regulation when one or more of the jointly produced products or services are subject to price regulation.

11. Approaches to Allocating Joint Costs
Allocate costs using market-based data
The sales value at splitoff method
The NRV method
The constant gross-margin percentage NRV method
Allocate costs using physical measure
-based data
No allocation

12. Example 1 : Farmers Dairy
SALES
20 gallons
@$8
Cream
25 gallons
Processing
$400
Raw Milk
110 gallons
LiquidSkim
30 gallons
@$4
Joint Costs
75 gallons
Splitoff
Point

13. Sales Value at Splitoff Method Cream $400*[25*8/(25*8+75*4)] = $160
관리회계2001
Sales Value at Splitoff Method
Cream $400*[25*8/(25*8+75*4)] = $160
Liquid Skim $400*[75*4/(25*8+75*4)]
= $240
Physical Measure Method
Cream $400*[25/(25+75)] = $100
Liquid Skim $400*[75*/(25+75)] = $300

14. Example 2 : Farmers Dairy
Butter Cream
Cream
Processing
$280
Raw Milk
110 gallons
Processing
$400
25 gallons
20 gallons
@$25
LiquidSkim
Processing
$520
Condensed Milk
75 gallons
50 gallons
@$22
Joint Costs
Separable Costs
Splitoff
Point

15. Estimated Net Realizable Value Method
관리회계2001
Estimated Net Realizable Value Method
Butter Condensed
Cream Milk Total
1. Expected final sales value
of production
2. Deduct expected separable
costs to complete and sell
3. Estimated NRV at splitoff point
4. Weighting
5. Joint costs allocated
6. Production costs per gallon
$500
280
$220
0.275
$110
$19.50
$1,100
520
$ 580
0.725
$290
$16.20
$1,600
800
$ 800
$400

16. Constant Gross-Margin Percentage NRV Method
관리회계2001
Constant Gross-Margin Percentage NRV Method
Step 1 : Compute overall gross-margin
percentage
Expected final sales value
of production $1,600
Deduct joint and separable
costs($400+$280+$520) ,200
Gross margin $ 400
Gross margin percentage %

17. Constant Gross-Margin Percentage NRV Method
관리회계2001
Constant Gross-Margin Percentage NRV Method
Butter Condensed
Cream Milk Total
Step 2 : Compute total costs
that each product should bear
Expected final sales value
of production
Deduct gross margin(25%)
Cost of goods sold
$500
125
$375
$1,100
275
$ 825
$1,600
400
$1,200
Step 3 : Allocate joint costs
Deduct separable costs
Joint costs allocated
280
$ 95
520
$ 305
800
$ 400

18. Comparison of Methods
The benefits-received criterion leads to a preference for the sales value at splitoff point method (or other related revenue or market-based methods).
Additional benefits of this method include :
1. No anticipation of subsequent management decisions.
2. Availability of a meaningful common denominator to
compute the weighting factors.
3. Simplicity.
The purpose of the joint-cost allocation is important.

19. Use of Joint-Cost-Allocation Methods (%)
Physical measure m.
Sales value method
Negotiated basis
Not allocated
Other 60 6 10 8 27 45 28 10 76 5 19 10 14
Source : Blayney and Yokohama(1991)

20. Joint-Cost-Allocation Methods Used by U.K. Companies
관리회계2001
Joint-Cost-Allocation Methods Used by U.K. Companies
Predominant Joint-Cost- Allocation Method Used
Type of Company
Petrochemicals Sales value at splitoff point or
Estimated NRV
Coal Processing Physical measure
Coal Chemicals Physical measure
Oil Refining No allocation of joint costs

21. Example 3 : Fragrance, Inc.
Mystique
Specialty
Chemical
Processing
$880
50 ounces
@$6
Processing
$160
Passion
Romance
150 ounces
@$4
100 ounces
@$8
Joint Costs
Separable Costs
Splitoff
Point

22. Joint Costs and Decision Making
Decision to further process or not
Incremental revenue of Romance
(100*$8)-(150*$4) $200
Incremental costs of Romance
Incremental operating income from
converting Passion into Romance $ 40
It is profitable to extend processing and to incur additional costs on a joint product as long as the incremental revenue exceeds incremental costs.

23. Accounting for Byproducts
When are byproducts first recognized
in the general ledger ?
When do byproducts revenues appear
in the income statement ?

24. Accounting for Byproducts
Timing of
Recognition
Presented
in I/S
Presented
in B/S
Production
Sale
Reduction of cost
Revenue or other
income item
Byproducts inventory
reported at selling
prices
Byproducts inventory
not recognized

25. Example 4 : Meatworks Group
SALES
400
@$60
Shoulder
Meat
500
Processing
$25,000
Lam
Shoulders 30
@$4
Hock
Meat
Joint Costs
100
Splitoff
Point

26. Method A : Byproducts Recognized at Time Production is Completed
1. To record manufacturing costs
Work-in-Process ,000
Various accounts ,000
2. To record costs of goods completed
Byproduct Inventory-Hock Meat(100*$4)
Finished Goods-Shoulder Meat($25,000-$400) ,600
Work in Process ,000
3. To record the cost of main product sold
Cost of Goods Sold[$24,600*(400/500)] ,680
Finished Goods-Shoulder Meat ,680

27. Method A : Byproducts Recognized at Time Production is Completed
4. To record the sales of main product
Cash or Accounts Receivable(400*$60) ,000
Revenues-Shoulder Meat ,000
5. To record the sales of the byproduct
Cash or Accounts Receivable(30*$4)
Byproduct Inventory-Hock Meat

28. Method B : Byproducts Recognized at Time of Sales
1. To record manufacturing costs
Work-in-Process ,000
Various accounts ,000
2. To record costs of goods completed
Finished Goods-Shoulder Meat ,000
Work in Process ,000
3. To record the cost of main product sold
Cost of Goods Sold[$25,000*(400/500)] ,000
Finished Goods-Shoulder Meat ,000

29. Method B : Byproducts Recognized at Time of Sale
4. To record the sales of main product
Cash or Accounts Receivable(400*$60) ,000
Revenues-Shoulder Meat ,000
5. To record the sales of the byproduct
Cash or Accounts Receivable(30*$4)
Revenue-Hock Meat

30. Income Statement of Meatworks Group
관리회계2001
Income Statement of Meatworks Group